rency and then drive it down to Los Angeles where they would give it to the undercover agents. It would then go off to Security Pacific National Bank, which was extremely helpful in our investigation, and then the money would be wire transferred to various places including as far away as Connecticut, Panama, and other places in and out of the country.

The Grandmother Mafia case illustrates another point that I think that it would be remiss of me to not discuss. That is corruption. During this investigation, we experienced five separate instances of corruption. There was a DEA agent in Los Angeles who leaked information to an attorney who was representing the main grandmother and who told that grandmother that she was under investigation. There was an IRS agent, now deceased, who orchestrated the robbery of one of the suspects of about $700,000. There was a third instance of corruption involving a leaking by a suspected Government agent in Miami to the main grandmother that she was about to meet with two undercover agents. There was another instance of corruption when a suspect named Carvajal was able to have someone inquire of the DEA NADDIS system about the potential criminal background of one of the undercover IRS agents. Thankfully, we had seen to it to put a fake undercover background in the computer system for the undercover agent. Otherwise, the investigation could have been blown and that man, who later did receive death threats, could have been in a great deal of jeopardy. Last, there were some anonymous telephone calls to one of the grandmothers up in San Francisco, alerting her to the fact that her telephone was about to be tapped.

I mention these instances of corruption because I think that it underscores the serious evil that narcotics is in our country today. I am pleased to say that we were able to overcome these instances of corruption. We ended up seizing 120 pounds of cocaine and approximately $3 million in currency and bank accounts, and the head grandmother is now serving a 25-year sentence and the major Colombia narcotic trafficker, Carvajual, is also serving a 25year sentence.

It seems to me that it would be appropriate just to talk a moment about the problem, under the present laws as I view them, in terms of bringing a prosecution for money laundering.

If Nathan Markowitz had been using a bank that was ignorant of the reporting laws and if he had been acting alone, I am not sure that we would have been able to prosecute him for anything because his contact with the undercover agents did not constitute a conspiracy between the agents and Mr. Markowitz. We had to find someone else who was a conspirator with Markowitz. We also had to identify the objects of the conspiracy.

There were two possible objects for such a conspiracy. One is a willful failure to not file reports. But if the bank was ignorant of the reporting laws, then you would not have complicity on the part of the bank. The second possible object is the conspiracy to defraud the Government by obstructing an agency, such as the IRS, in its role to investigate cases. This is also difficult to prove.

We also have the problem of the smurfing operations which have been the subject of some discussion earlier today. I think that right

now, under present law, it is extremely difficult to prosecute someone who is involved in a smurfing operation.

I do believe that the attempt of this committee to move for a violation of Federal law which would make it against the law to launder money, knowing that the money came from an illegal source, will be a great boon to law enforcement efforts.

I think that that concludes my comments and I will certainly be happy to answer any questions.

[The statement of Mr. Perry follows:]

TESTIMONY OF ROBERT J. PERRY

INTRODUCTION

I am a partner with the law firm of Epstein Becker Borsody & Green in our Los Angeles office at 1875 Century Park East, Suite 1600, Los Angeles, California 90067. I advise financial institutions regarding federal currency reporting requirements and how to protect themselves from money launderers.

For nearly twelve years, I served as an Assistant United States Attorney in Los Angeles. I was the Chief of Financial Investigations, and prior to that I served as the Chief of the Controlled Substances Unit. As a federal prosecutor, I specialized in utilizing financial investigative techniques to investigate major drug trafficking and money laundering organizations. In 1977, I prosecuted the case of United States v. Jose Valenzuela, which involved one of the first uses on the West Coast of the continuing criminal enterprise statute (21_U.S.C. § 848). The chief defendant in that case received a life sentence for narcotics violations. In 1979, I prosecuted the case of United States v. Jaime Araujo, which involved the laundering of more than $32 million in currency derived from the sale of heroin and cocaine. That investigation was initiated by currency transaction reports, and the lead defendant is presently serving a 35-year prison sentence. In 1980, I established the initial Financial Investigations Task Force comprised of agents from the IRS, DEA, and U.S. Customs to facilitate the financial investigation of major narcotic trafficking organizations. Similar task forces exist today in most of our major cities. In 1981, I prosecuted the case of United States v. Garfield Bank, which involved the willful failure of a bank to file currency transaction reports as part of an international money laundering operation which I will discuss shortly. I will also discuss today my prosecution in 1982 and 1983 of the "Grandma Mafia" case, which involved the laundering of more than $25 million in 81⁄2 months. In January, 1984, I joined the prosecution team and was a co-prosecutor in the case of United States v. John DeLorean.

I have spoken widely on the subject of financial investigations of narcotics cases. I was privileged to address the Bank Administration Institute's national convention on security in Washington, D.C. in 1984; the Royal Canadian Mounted Police in Ottawa, Canada in 1983; Interpol, in Paris, France in 1982; and Department of Justice national narcotics seminars in Washington, D.C. (three times), Boston, New Orleans, Los Angeles and Phoenix. In 1980, I prepared a two-hour video tape lecture on financial investigations which is used by the IRS and the FBI in training. In 1979, I testified before the Senate's Permanent Subcommittee on Investigations of the Committee on Governmental Affairs on the subject of the use of financial information in narcotics prosecutions.

THE PROBLEM OF MONEY LAUNDERING

I am pleased to have this opportunity to address the committee on the subject of money laundering and the need for a criminal statute which makes the act of laundering money a federal offense.

At the outset, I wish to commend this committee for its fine work in the passage of the provisions of the Comprehensive Crime Control Act of 1984 which greatly strengthened the laws pertaining to currency reporting. Specifically, I believe that the increases in the civil and criminal penalties, the addition of the attempt provision, the clarification of warrantless search authority, the informant reward provision, and the expanded coverage of RICO and wiretapping for currency offenses will be of great value in the fight against organized criminal activity in this country. Money is the lifeblood of criminal organizations, and the strengthening of the reporting laws will clearly assist law enforcement in identifying the proceeds of illicit activities. We have come a long way. In my view, the need exists to go further.

Money laundering is a major problem in our society, and a major obstacle to the investigation of organized criminal activity. Simply put, money laundering is any process by which receipts from illegal activities are handled in such a way as to make them appear to have come from a legitimate source. In other words, taking "dirty" money, "washing" it, and making it appear to be "clean"-hence, the term "money laundering".

Narcotic traffickers and other organized criminals generate huge sums of currency from their illicit activities. Narcotics, prostitution, gambling, and similar offenses are cash businesses. (One does not buy cocaine with a credit card.) Large quantities of currency are a liability for the criminal. Currency in unusual quantities attracts other criminal and the attention of law enforcement. Large amounts of currency are inherently suspicious, and the narcotics trafficker who purchases a house with $250,000 in currency is inviting investigation. The criminal has a tremendous desire to launder his currency, so that he can spend his ill-gotten gains without attracting the attention of law enforcement.

Most money laundering schemes involve taking currency derived from illegal activities in the United States and transferring the money to a financial institution in a foreign country which has strict bank secrecy laws. Once the money has reached its foreign destination, it is safe from U.S. law enforcement attempts to identify its true source. The criminal, at his leisure, can then transfer the money back to the U.S. and spend it with impunity.

There are two ways to get the money to the institution in the bank secrecy country. One method is to bulk ship the currency by boat or plane. This is highly risky because U.S. Customs has increased its ability to identify outbound shipments which, if detected, are forfeitable to the United States. The recent amendments to the currency laws increase the risk because of the clarification of Customs' authority to conduct outbound searches and the incentive provided by the potentially large informant rewards for currency seizures.

The more popular, and safer, way for the criminal to get his currency to the foreign institution is to deposit the currency in an institution in the United States and wire transfer the money to the foreign institution. It is often surprisingly easy for a criminal to find a domestic financial institution which is willing to accept large currency deposits and not file the required currency transaction reports. Sometimes, financial institutions are so anxious for large deposits that they willingly agree to "look the other way" to accept the criminal's business. Other times, a branch manager or someone in a position of reponsibilities will accept bribes to not file reports. Recently, we have seen a proliferation of cases involving individiuals who go from institution to institution purchasing cashier's checks in amounts under $10,000. The cashier's checks are then transported out of the country.

I will discuss today two cases which I prosecuted which illustrate the pressures on our domestic financial institutions to launder money. In the Garfield Bank case, a bank yielded to these pressures and became part of an international money laundering operation. In the Grandma Mafia case, an alert banker helped law enforcement identify and apprehend a major narcotics trafficking organization.

THE GARFIELD BANK CASE

In 1980, I coordinated the investigation of the Garfield Bank case. The investigation was jointly conducted by agents from the IRS, U.S. Customs, and the DEA.

We had received information that an attorney in Beverly Hills named Nathan Markowitz was providing a money laundering service for clients who were narcotics traffickers. Two undercover IRS agents were able to meet Markowitz. They told him they were narcotics traffickers and desired to utilize his money laundering service. Over the next many months, the agents had several tape recorded meetings with Markowitz and listened while he explained his money laundering operation. The agents also gave Markowitz a total of $250,000 which he laundered.

Markowitz' money laundering operation involved the Garfield Bank, a small bank of four branches in Los Angeles. Markowitz received large quantities of currency from his narcotic trafficker clients. He caused the currency to be deposited to accounts he controlled at the Garfield Bank, and he arranged for bank officers to not file currency transaction reports for the deposits. After the money was deposited at the Garfield Bank, Markowitz caused it to be wire transferred to trust accounts at the Bank of Bermuda in Bermuda. The trust accounts were controlled by fictitious investment advisor "companies" which were registered in Liberia. Markowitz registered the companies in Liberia because Liberian law permits the issuance of "bearer" stock (the stock certificate lists the owner as the bearer of the stock).

Markowitz used Bermuda trusts because of Bermuda's strict bank secrecy laws which bar the release of financial information to U.S. authorities.

After the money was wire transferred to the Bermuda trusts, it was wire transferred back to the United States to accounts held by sham U.S. corporations which Markowitz had established for his trafficker clients. Markowitz caused fictitious loan documents to be prepared, which made the money from the Bermuda trusts appear to be loans from the offshore trusts to the U.S. corporations. Since the money appeared to be loans, the corporations were not required to pay income taxes on the loans, and in fact were able to claim deductions for the loan "payments" made to the Bermuda trusts. Markowitz established the trafficker clients as officers of the corporations.

Markowitz's laundering_scheme falsely legitimized his trafficker clients and enabled his clients to conceal the nature of their income and to evade income taxes on that income. The evidence showed that during the period of January, 1978 through October, 1980, Markowitz caused 29 currency transactions over $10,000 at the Montebello and Hollywood branches of the Garfield Bank. The transactions ranged from $36,020 to $491,790 and totalled $3,324,250.

In January, 1981, agents simultaneously executed search warrants on Markowitz' office and two branches of the Garfield Bank. Due to the need to review the evidence obtained from the searches, no one was arrested. A few months later, Markowitz inquired about possibly cooperating with the government. A week later, he was murdered. His body was found in the stairwell of a Century City parking structure. Officers found approximately $56,000 in currency on his body, and it is believed that this was a "contract" murder to ensure his silence.

In July, 1981, a federal grand jury indicted the Garfield Bank, its president and chairman of the board, a vice president, a former vice president, and three others who had worked with Markowitz. The Garfield Bank pleaded guilty to a felony violation of federal currency reporting laws. The Bank was fined $309,106 which was equal to the Bank's entire net income for 1980. The president and chairman of the board also pleaded guilty to a felony currency reporting violation and to two felony counts of income tax evasion. As a condition of a plea agreement, the president, who was elderly and in poor health, resigned his positions at the Bank, agreed to pay a fine of $100,000, and agreed to pay $1,890,000 in back taxes, penalties and interest. As a result of the guilty pleas, the government collected $2,299,106.

The vice president and Markowitz's associates were convicted following a threeweek jury trial, and received various prison sentences ranging up to four years. Due to the negative publicity surrounding the Bank's indictment, it is believed that a significant percentage of the bank's assets were withdrawn by depositors.

THE GRANDMA MAFIA CASE

Another case which shows the pressures on financial institutions by criminals who want to launder money is the Grandma Mafia case. In late 1981, the president of a small bank in Manhattan Beach, California, was approached by a middle aged woman from Florida. The woman asked the banker to accept currency deposits and not file currency transaction reports. The banker contacted the IRS.

We commenced a joint investigation involving agents from the IRS, U.S. Customs, and the DEA. We asked the banker to "play along" with the woman and to tell her that he had agreed to not file the reports.

In October, the woman opened an account with a deposit of $20,000 in currency. A month later, she deposited $285,000 in currency. The next day, she deposited $565,000 in currency. In the four months from October, 1981 through the end of January, 1982, the woman and others working with her delivered more than $5 million in currency to the small bank. The money was delivered in suitcases, and was counted in the back room of the bank. The banker wore a recording device and the deposits were surveilled by government agents.

Near the end of January, the woman expressed concern to the banker that his bank was too small and that federal examiners might detect the illegal flow of currency through the bank. She asked the banker if he was aware of a larger institution which could accommodate her currency activities and not file reports. The woman was introduced to two undercover IRS agents, who established an office in Hollywood. The agents represented that they had access to a larger institution which could accommodate large currency deposits without notice and which they had bribed to not file reports. The woman commenced making currency deliveries with the IRS agents in February, 1982. During the next five months, she and others working with her delivered approximately $20 million in currency to the agents. The deposits ranged in size from $280,000 to $1,880,000 and were delivered by

middle aged women, most of whom were grandmothers and none of whom had a prior criminal record. All told, the grandmothers delivered $25,800,000 in currency in a period of 81⁄2 months! Pursuant to the women's instructions, the money was wire transferred to Panama, and to accounts maintained by money exchangers in Florida and Connecticut.

By using wiretaps on residences in California (including a house in Beverly Hills which was rented for $8,000 per month), and by adding DEA undercover agents to the investigation, we were able to identify various sources of the currency. In May, a search warrant was executed and 37 pounds of cocaine was seized from the residence of a 60-year old grandmother. In June, undercover agents were introduced by one of the grandmothers to a major Colombian narcotic trafficker who gave the agents $1 million worth of cocaine (20 kilograms) on credit.

The investigation culminated with the simultaneous execution of search warrants and arrests in Miami, Los Angeles, San Diego, and San Francisco. During the investigation, more than 120 pounds of cocaine and $3 million were seized.

Ten defendants were arrested and convicted. The leader of the grandmothers and the major Colombian narcotics trafficker each were sentenced to 25 years imprison

ment.

The investigation was marred by several instances of corruption. A DEA agent leaked information to an attorney of the chief suspect that an investigation was ongoing. An IRS agent, now deceased, participated in the armed robbery of the one of the suspects of $700,000 in currency. A DEA agent in Florida is suspected of having leaked information to one of the grandmothers that she was about to meet with undercover agents. A suspect was able to have someone make inquiry of the DEA Naddis computer system in Florida to check whether an undercover agent had a criminal background. In addition, there were anonymous telephone calls to a suspect that her telephone was going to be tapped. Despite all these problems, the investigation had a successful conclusion.

The Grandma Mafia case graphically illustrates the fact that anyone can be tempted by the profits involved in narcotics trafficking and money laundering, and that bankers are in a position to assist law enforcement. The corruption which surfaced during the investigation further underscores the evil that narcotics presents to our society.

THE NEED FOR A MONEY LAUNDERING STATUTE

Presently, money laundering activities are prosecuted as violations of federal reporting requirements (Title 31, U.S.C. § 5322) or as conspiracies to defraud the government by obstructing the IRS or some other agency in the lawful performance of its duties (18 U.S.C. § 371). Prosecution under these statutes is difficult. To prosecute for a Title 31 offense, it is necessary to show that the defendant was aware of the reporting requirement and acted to avoid having reports filed. Individuals in money laundering investigations are often observed acting suspiciously with large quantities of currency, e.g., conducting counter surveillance, driving in an evasive manner designed to lose surveillance, etc. Such acts indicate an intent to violate the law, but they do not give rise to the inference that the suspect is knowledgeable of currency reporting requirements and that he is acting to avoid the requirements. Similarly, to prove a conspiracy under present law, it is necessary to show that the suspects acted in concert to avoid currency reporting requirements or to obstruct law enforcement in its official duties. This presents significants technical barriers to charging individuals who are obviously involved in criminal activities. For example, had Markowitz been acting alone in providing a money laundering service by sending money abroad and bringing it back, it is likely that he could not have been prosecuted because the evidence was gathered by an undercover agent who lacked the criminal intent to enter into a conspiracy.

Narcotics trafficking is a $90 billion a year business. Other organized criminal activities generate several billion more. The pressures to launder money are enormous. The potential for our domestic financial institutions to be drawn into money laundering schemes is every present and growing. It is a lurking danger.

This committee's proposal to enact a money laundering statute is an idea whose time has come. The enactment of a statute which directly addresses the problem of money laundering would be a significant addition to the federal arsenal and would greatly assist law enforcement's ongoing fight against organized criminal activity in this country.

Mr. HUGHES. Thank you Mr. Perry, for an excellent presentation. I have a couple of questions.